It’s painfully obvious

Ours is a consumer driven economy.  Household spending accounts for about 70% of our GDP.  Graph:

Since 1999, American households have been spending more money than they have.  We are running our own deficit spending programs.  Isn’t it beyond obvious that when the credit runs dry, GDP will collapse? See charts and analysis of household deficit spending:householddeficit.pdf

Newest and gloomier IMF report: worsening global financial markets

Today IMF released its latest report on global financial markets (well worth a read – see link).  Financial markets have worsened as evidenced by pressure on bank balance sheets, and problems will broaden as credit deterioration widens.  IMF recommends transnational stabilization efforts.  Direct link to report:

    imf01292008.pdf

Houses in Cleveland – only $1 apiece

HUD is offering at least 120 houses in Cleveland for sale at $1 each.  I don’t think fiscal stimulus will fix this, but it does help to answer the question of how low can home prices really go.

http://blog.cleveland.com/metro/2008/01/the_foreclosure_crisis_what_it.html

Interested in a glimpse of things to come?  Cleveland’s housing bust started early – read here Mother Jones’ “Prime Suspect” — a compelling description of life in Cleveland’s Slavic Village area was already like in 2006.  This may be what neighborhoods all over the U.S. will be like as housing prices decline:  http://www.motherjones.com/news/feature/2006/09/prime_suspect.html

Deja vu – Bernanke will prevent (cure?) deflation with a copy machine

Way back when he was “just” a Fed Governor, in 2002, Bernanke gave an amazing speech detailing what he would do to prevent or cure deflation.  I read him as saying that he doesn’t think the U.S. will go into deflation because our financial system (banks and household balance sheets) are so healthy (forget that now!).  The other reason he gives is that the Federal Reserve can itself prevent or cure deflation.  Bernanke gives a list of the steps he would take — and it looks as if he’s already several steps down on the list with the TAF auctions.  But never fear, as a bottom line Bernanke thinks we should all be comforted by the fact that if all else fails, he’s got a printing press (oops, a copy machine) to print lots of dollar bills and reinflate the economy. 

It’s true, and worth another close read: 

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/#f8

Is your pension fund invested in credit derivatives?

This is the nightmare scenario:  pension funds invested in CDOs and/or other derivatives are swamped by the massive unwinding process underway.   Where then does the money come from to pay retirees? 

This great unwinding has potential consequences not only for U.S. pensioners, but certainly the U.K. and possibly beyond.  Here is a terrific and concise explanation of the relationship between CDO downgrades and U.K. pension funds by Ken Griffin and Jeff Moskowitz:

Massive foreclosures in Massachusetts; up a stunning 600% over 2005

We’ve heard a lot about the Southwest, California and Florida lately.  But the collapse of credit, wealth and homeownership is no doubt occurring throughout the United States.  Case in point:  Massachusetts.  There, the number of foreclosures in 2007 was 600% higher than in 2005.  And 150% more than 2006. 

BOSTON–(BUSINESS WIRE)–Foreclosure deeds in Massachusetts more than doubled in 2007 when compared to 2006, and were up seven times the number of foreclosures in 2005, according to The Warren Group, publisher of Banker & Tradesman.

China hit by subprime credit crisis

* Chinese bank earnings will suffer because of subprime crisis and tighter monetary policy and macro-economic controls

* Chinese regulators and banks are studying the credit crisis

* Beijing expects bad loans may rebound this year (Adds comments from China’s banking regulator)

By George Chen

SHANGHAI, Jan 21 (Reuters) – Earnings at Chinese banks will probably be hit this year by the snowballing U.S. subprime mortgage crisis and Beijing’s moves to cool the economy, the president of the country’s sixth-biggest bank said on Monday.

“We have to be very realistic: we are facing many challenges this year which are not only from home but also abroad,” China Merchants Bank Co  President Ma Weihua told Reuters in an interview.

The bank, China’s biggest non-state lender, made some U.S. subprime-related investments in 2004 and sold them two years later for 13.4 percent returns.

But the country’s bigger, state-owned banks could suffer.

Real economy effect of crisis: State retirement and health care funds in peril?

Update:  What About the Munis?  → good article:   http://wallstreetexaminer.com/blogs/winter/?p=1348

Is the current credit crisis and resulting loss of asset valuation having an impact on pensions and healthcare benefits?

Yes – see two preliminary reports below.

pew.pdf     ← The Pew Center on the States released a report in December 2007 highlighting the perilous footing of  the states’ funding of their long-term retiree benefits (both pension and nonpension).  Click through to full report.  

Economic stimulus – just talk; no walk

Published on Friday, January 18, 2008 by CommonDreams.orgStimulate This: Why the Talk of Economic Stimulus Will Remain Talk

by Danny Schechter

The new word of the week is “economic stimulus package.” Everyone is for it.The President wants it if only because he knows a worsening economic crisis will leave his Administration in deep doo-doo, the way it did his dad’s back in ‘92. Ben Bernanke, chairman of the Federal Reserve, is all for it if only because all of his rate cuts and “injections” of money into the financial system have not turned the US economy around.

Comptroller General Wants Urgent Action on Hard Choices

comptroller.pdf 

The Honorable David M. Walker, Comptroller General of the United States, has been loud and clear in warning Congress, the administration, academia, and the public that the US economic situation requires urgent and radical measures.  “The status quo is not an option.”  

Tax breaks & $800 cash – will it save the U.S.?

Robert A. Kezelis in Capitol Hill Blue 

Tax breaks? No, no, no! a thousand times, NO!

Yes, the economy is in trouble. Yes, new home sales are down. Yes, every financial institution is shedding workers faster than my Great Pyre sheds fur. Yes, we have structural, social, emotional, and serious economic problems facing us. All true, all sad, all present and in our face.The worst possible response is the one our Fearless Leader, George W. Bush, presented. Unfortunately, his partner in crime, Nancy Pelosi, has already given George two gold stars:
first, any crime he committed in the past, or will commit in the future, gets a pass by congress; and,
second, she has already guaranteed that she will accept whatever proposal he recommends.I guess Nancy Pelosi represents what constitutes leadership these days. I never realized that the Speaker of the House of Representatives was nothing more than a syncophantic, boot-licking, rubber-stamping, acquiescent, mindless, and ass-kissing lover of the president, even one as craven and illegitimate as this one.

Bernanke’s message to Americans: Run! Run for your lives!

http://www.huffingtonpost.com/linda-keenan/bernankes-message-to-ame_b_82160.html

Is it panic time yet?

Mainstream media reporting via Steven Pearlstein in “Caught in Downdraft and Starting to Panic” (Washington Post) -  we’ve moved through the various stages of economic grief and moved into panic mode?  Hattip Reggie Middleton

• Willful blindness. (“Bubble, what bubble?”)
• Denial. (“House prices never fall. It’s only those speculators in Las Vegas and the Gulf Coast.”)
• Rationalization. (“Maybe subprime did get out of hand, but it’s really a small part of the market.”)
• Fantasy. (“Things should be pretty much back to normal by the second half of ‘08.”)
• Anger. (“If it weren’t for those yahoos up in structured finance…”)
• Capitulation. (“We might as well take these write-downs now and get it over with.”)
• Depression. (“This is going to get worse before it gets better.”)

and then….PANIC..culminating in unraveling of CDO situation.

My comment:  Never fear:  According to CNBC, this is all simply a self-fulfilling prophesy, not reality-based — and all we need is another Wall Street “innovation” like a new kind of CDO! 

Satyajitt Das: Wall Street Loves Socialism in bad times

Satyajitt Das’s blog has an article of interest on the current movement in U.S. of privatizing gains and socializing losses.  In good times, Wall Street embraces capitalism, but when the tide turns, the Street flips and chooses socialism every time.

Das is a derivatives expert (maybe THE derivatives expert) and author of “Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives” (2006) — a must read.

http://www.wilmott.com/blogs/satyajitdas/index.cfm/2008/1/15/Socialism-for-Wall-Street

Bernanke, looking jittery and haunted, testifies – open comment

Watching this testimony live, without benefit of transcript, Bernanke incredibly is saying there will NOT be a recession!  Forecasting slower growth picking up in late 2008.  Some decent questions from Congresspeople re: why would a rebate actually improve economy?  Shift from pro-savings economy to pro-debt, etc.

Comments? 

Why is Bernanke talking so optimistically (yet looking terrible)?

What will Congress do on fiscal side?

Will Bernanke lower rates on 1/30 and if so why?

Cheers!